We use Land Trusts for our Real Estate Investments. This article on Business Trusts is a good one though so we’re going to be rethinking our strategy. Enjoy.
Reprint from Scott Smith (Bigger Pockets September 16 2020)
You’ve done all the work to prepare for retirement, investing in your future by contributing to your individual retirement account (IRA) or self-directed IRA (SDIRA).
You’ve done your research to choose the right investments at the right risk level for you to ensure your future is stable and well funded.
So, it would probably surprise you to know there are other dangers lurking that could end up depleting these funds and destabilizing the future you’ve been planning for.
Today, I want to tell you what I tell my clients about business trusts and how they can help real estate investors protect their assets both today and in their retirement years.
How Are My Investments at Risk?
If you’re a doctor, corporate executive, or landlord, you already know that your profession puts you at a high risk of litigation. Did you know that your retirement assets are also at risk if you file for bankruptcy, divorce your spouse, or end up in a civil lawsuit?
If you are a parent, your investments are equally at risk if your child causes an injury to another person. An injury happening on your property, whether your boat or your land, can also lead to financial ruin in the case of a lawsuit.
Built-In Asset Defense
Some state and federal laws can protect your assets in these situations. For example, up to $1 million in IRA contributions and gains are protected from bankruptcy. The same goes for qualified employer-sponsored plans such as SEP and SIMPLE IRAs. In addition, the Employee Retirement Income Security Act (ERISA) protects many plans from bankruptcy and litigation.
What Is a Business Trust?
To build in a more robust defense of your assets, most experts recommend establishing a business trust or LLC to hold them. (This method is fully allowed by the IRS as a protective strategy.) There are many resources online to learn about the benefits of an LLC to protect your assets, but a business trust can take things a step further and offer more robust protections.
Privacy and Reducing Personal Liability
You are not legally required to make your business trust a public filing. The Declaration of Trust, trustee names, addresses, or any personal information are all private when part of a business trust.
On the other hand, an LLC has to submit its Articles of Organization with the Secretary of State, which makes public your name, address, and the manager of the business.
The investments made by your business trust and all gains from it are legally separate from your personal assets. This benefits you in two ways: Your personal assets are protected from legal ramifications if your business trust defaults on a property loan, and your business assets are protected in the event of a personal bankruptcy.
While these protections are in effect in theory for an LLC, you must remain in complete compliance with regulations for that to be the case. This means staying on top of annual filings, fees, and requirements.
Business Trusts Are Fast & Easy to Establish
There are no fees to start or maintain your business trust, and since they are not a public filing, there are no approvals needed to start. In contrast, an LLC requires name reservations, applications, waiting periods, government filing fees, and regular reports with the Secretary of State (varies by state). Plus, it can take up to three months to finally become an approved legal entity for investments.
A business trust and an LLC both give you the choice of filing taxes as a partnership or a corporation, but a business trust also allows you to file as a trust. (LLCs will permit personal filing, as well.) When filing as a partnership, business trusts and LLCs are required to file federal and state income tax returns. A partnership with a single owner, though, can be “disregarded as an entity separate from its owner.”
A business trust in this situation means not having to file a federal or a state tax return, while LLCs are still required by most states to file income tax returns.
These can be tricky waters to navigate, and it can be tempting to handle it all yourself for simplicity’s sake. But every penny counts when planning for your future, so be sure to hire financial and legal professionals who are familiar with all the relevant regulations to assist you in setting up and managing your business trust.